FTC V. BIGSMART - SLAP AND A LEASH

By Jeffrey A. Babener
  2001

FTC SLAPS BIGSMART.

Unlike recent business "executions" of MLM’s Equinox and 2Extreme, the first major FTC action against dot com MLMs, Bigsmart.com, was instead a slap and tight leash. In its lawsuit, the FTC accused Bigsmart of illegal pyramid activity, but almost simultaneously, in a mutual consent judgment, allowed Bigsmart to go forward under tight restrictions.

" ... the FTC accused Bigsmart of encouraging distributors to purchase multiple web sites and qualify those web site "shopping malls" by purchasing products of questionable value and price."

MLM WEB MALLS.

At the turn of the millennium, Bigsmart.com was one of several MLM web malls. As with others, it came under state and federal regulatory criticism for its practices. The business model for Bigsmart was somewhat different than other MLM web malls that were accused of frontloading multiple web sites on distributors and paying commissions based upon purchase of multiple web sites. In the Bigsmart model, the FTC accused Bigsmart of encouraging distributors to purchase multiple web sites and qualify those web site "shopping malls" by purchasing products of questionable value and price. For the FTC, as in other cases, it all boiled down to lack of retailing to non-participant customers. In the words of the FTC, "there are few, if any, sales of these products to non-members" and thus, Bigsmart was accused of running a pyramid recruitment scheme in which distributors made money from recruiting others.

FTC/BIGSMART CONSENT.

Unlike earlier draconian actions by the FTC, there is clearly life for Bigsmart after its FTC consent decree. In fact, the decree entered in March 2001 occurs almost simultaneously with the filing of the complaint, which suggests a substantial period of time in which Bigsmart and the FTC negotiated an exit strategy in which Bigsmart would be allowed to continue, but under tight restrictions. Emerging from the FTC settlement, a number of significant facts are to be noted:

  1. In keeping with the FTC’s desire for retailing, Bigsmart adopted a policy of requiring active shopping center distributorships to demonstrate $35 per month of retail sales to non-distributors;

  2. Bigsmart agreed to a $5 million consumer redress fund;

  3. Bigsmart agreed to posting of various sorts of performance bonds;

  4. Bigsmart agreed to tight restraints in terms of representations to the public and tight monitoring of its distributors; and

  5. For periods of up to ten years, the principals of Bigsmart are required to provide detailed reports to the FTC on their various business activities.

The case appeared to accomplish the goals of the FTC and protection of consumers while still allowing Bigsmart to continue in business. Only time will tell whether this model will work for both entities.

MLM WEB MALL SCAMS.

Although the Bigsmart model pays on product sales, the more prevalent MLM dot com abuser has paid its commissions on multiple web site purchase fees. It is the replicating template web site attached to an e-commerce virtual mall that has created the most excitement and the most skepticism in the network marketing industry. In particular, it is the business model in which distributors are encouraged to purchase multiple replicating web sites, and then are encouraged to cause others to buy multiple replicating web sites, all of which are used primarily for recruiting rather than e-commerce, that is causing the greatest concern. Regulatory agencies in both the United States and abroad have taken aim at companies which sell multiple web sites, accusing them of being front-loading, headhunting recruiting schemes. In fact, the point is well taken. Such business models are often not about e-commerce, but use the "facade" of e-commerce to run a cash pyramid scheme in which the "real money" is made by recruiting individuals to "front-load" other individuals with multiple web sites that are not so much for the marketing of products or services, but are used for recruiting others to do the same or are just plan "unused."

A PLAGUE OF SCAMS.

Periodically, the network marketing industry is faced with a phenomenon in which distributors leave legitimate product or service companies in droves to partake in a feeding frenzy in a "facade" MLM opportunity. The industry has seen this in overpriced phone cards, diet cookies, garage loads of water filters, high priced training fee telecom programs, gold bullion contract programs, travel and discount buying service packages, and a host of others. Such programs are short lived, but the industry suffers as individuals jump on the latest MLM junkie "pyramid train."

The multiple front-load recruiting web site phenomenon is no exception. In fact, it is a phenomenon that knows no borders. Perhaps the best analogy is the granddaddy of pyramid schemes, Dare to be Great, in which individuals paid thousands of dollars to attend motivational seminars in which they were taught how to recruit others to come to similar motivational seminars.

WEB SITES CAN BE REAL.

The Internet scams should not be confused with legitimate products and services relating to the Internet. For instance, marketing Internet access at competitive prices with AOL or MSN is perfectly legitimate. The marketing of web site hosting services to small businesses or individuals who buy those web site hosting services because they intend to use them and do use them for purposes other than "buying into the deal" or recruiting others to do the same, is legitimate.

Most major MLM companies have offered their distributors replicating web sites that tie into the home page of the MLM company to sell its products or services. This is a very useful tool, which is provided to MLM distributors to expand their business. It is entirely legitimate. It is questionable whether such web sites should be commissionable, in that they are being used as a sales tool, rather than sold as an independent web site hosting product. That issue must be left for another day, however, and companies have adopted different policies on this point.

AVOID MLM MALL SCAMS.

It is the "scam" type template programs that individuals should steer clear. These are programs in which web template fees are paid to participate "in the deal" and not to move products or services. Individuals who are earning thousands of dollars a month in such programs are earning money not from e-commerce, but from front-loading their downline with multiple template sales.

Here are some of the warning signs that individuals should pay attention to before participating in a web hosting template multilevel program:

  1. If individuals are encouraged to buy multiple web template sites, it is likely a sign of front-loading.

  2. If the primary use of the web sites that are sold is to recruit others to purchase similar sites, red flags arise.

  3. If, in discussing the program with others, it appear that little or no e-commerce is accomplished in a web template program associated with a virtual shopping mall, the MLM program is merely a "front" for moving money.

  4. If there is really very little or no money to be made in e-commerce, this should cause concern.

  5. If it turns out that many of the web template sites that have been sold by the company have not been initiated, this is a problem.

  6. If the company sells multiple web sites and commissions are paid on web site sales before web sites are initiated, the program bears similarity to the illegal program of Gold Unlimited in which commissions were paid on gold contracts before gold was shipped.

  7. If the company holds itself out to be a web site hosting company, but it cannot demonstrate sale or usage of web sites outside of the network of recruiters, this is indicative that the only reason people are buying the web template sites is to "buy into the deal."

  8. If the company has located itself offshore, it is probably anticipating challenges to jurisdiction of U.S. authorities or shielding of assets outside the United States - a major red flag.

A VIABLE MLM MALL FUTURE?

The fact is that no MLM company has stood the test of time that did not offer a quality service or product to its distributors and the general public. Over time, companies which have used fads or fashionable products or services as a "facade" to move huge sums of cash, have littered the highways of the network marketing industry. If individuals would like to think of the MLM industry as a lottery or a game of chance or a "deal," then the front-loading MLM replicating web site template programs are the latest of the "money games" for them. When the "money games" have passed, however, the rest of the legitimate network marketing industry will likely say "good riddance" and hope to attract distributors back to programs with "real" products and services with a real long term future. In the aftermath of its settlement, if Bigsmart.com can transform itself into a viable product seller to "retail customers" then both the FTC and Bigsmart will be well served.


Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

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